It is no secret that India has experienced impressive growth in the last decade, as the global marketplace has driven demand for IT and business process outsourcing. While the Indian economy has made real progress, the lure of cheap developer talent will not be enough to sustain the ongoing growth that could truly enrich the country’s future. Banking on the spoils of labor cost arbitrage can only take India so far and with 40 million people looking for work and an estimated 35 million more poised to join the labor force during the next three years, economic progress can’t afford to stall. To replicate and build on the successes of its outsourcing industry, India’s leaders must lower barriers to trade and more importantly, encourage new levels of entrepreneurship, capitalism, risk-taking, and creativity.

A richer future for India means crossing the canyon from arbitrage to innovation. Look at the example of Japan’s beginning in the 1960s. The country jump-started its post-war economy by making cheap knock-offs of U.S. goods. Yet it had the foresight to move beyond this strategy to become the world-class innovator in manufacturing and electronics that it is known as today. India would do well to learn from this example. Four things need to happen to ensure that the stage is set for a more innovative, dynamic, and competitive India:

Loosening up of bureaucracy.
At the end of the day, innovation can only spring forth in an open, flexible, and uninhibited market. The frustrations of dealing with India’s large and cumbersome bureaucracy are well known. Foreign investors and business travelers are often daunted by the seemingly endless amount of red tape they must wade through, while Indian businesses face countless rules and regulations. It is incongruous to think that what might take a single week to accomplish in the U.S., such as starting up a company, could take in excess of six months to a year in India. To compete as a true global player, India’s system needs to change. A more streamlined and open system will encourage investment, capital formation, reduce “brain drain” (i.e., top talent moving elsewhere to bring their ideas to fruition), and result in a more dynamic leading-edge marketplace.